It’s certainly not an ideal market, but the market is not encumbered by legislation that hampers the ability of each party to negotiate freely. The owners are free to offer or not offer contracts, the players are free to accept or not accept for any reason. I’m using “free” to denote that none of the parties are forced to make any particular decision regarding the negotiation, they act entirely on their own accord. Enact a salary cap, like in football, and the owners are now restricted, they are not free to offer contracts to any players their finances can afford.
WRT to the market issues, the barrier to entry is similar in Executive-land. There are only so many prime jobs out there, new jobs require new corporations. You don’t get considered for a CEO job without doing your time in the “minors” either at a smaller company or as an underling with a large company.
I’ll confess to not having checked out your links, but can you clarify what you mean by “broken”? If CEO pay does not corrolate to comapny performance, I don’t see that as in indication that the sytem is broken. If we saw a negative correlation, then I think we could consider that the system might be broken, but I’m not sure it’s even that simple (CEO pay vs performance of individual companies and nothing else).
Okay, but I’m using “free” to mean a market that actually behaves like the competitive free market of economic theory. Potential for confusion here, hopefully averted.
Which also makes Executive-land not a genuine “free market” in the sense I’m using the term.
I think this is an important point, because a lot of people use the term “market” rather sloppily and make fallacious arguments on the strength of that. They say “You can’t regulate such-and-such a transaction, that’s interfering with the market!” The implication is that because free, competitive markets are very efficient economically (as indeed they are), therefore we shouldn’t distort them with regulation.
However, if the market in question is already significantly non-free and non-competitive, then maybe it’s not all that economically efficient, so the “don’t mess with the free market” prohibition doesn’t apply.
In short, I don’t automatically trust arguments to the effect that “we shouldn’t regulate such-and-such because markets are more efficient than government”. I want to know whether a particular market actually is a reasonable approximation of a genuine free market, and whether it actually does operate efficiently or not, before I make up my mind whether or not we should regulate it.
Yep, thanks. THis version of the paper [PDF] seems to be easier to read with the charts ( is this what you were initially trying to link to?) Anyway, I am surprised she used the term law od diminishing utility of wealth since later on in the paper she discusses quite clearly how there does not seem to be any such law and certainly there is no consensus. Using Google this is the only reference I cold find to the “law” as such. Anyway, I don’t necessarily feel this is a big deal and worth either of us getting all worked up about.
Sorry for interrupting this discussion with my pedanticism (is that a word?).
One way in which the executive compensation system is broken is that, as Bebchuk and Fried find in the research I linked to earlier, it doesn’t actually operate like a real free market. Therefore, anybody who argues that current executive pay levels must be optimal, because markets are efficient, is making a false assumption. Considered as a competitive market process, the executive pay system is definitely “broken”.
However, I don’t know how much this applied before the past few decades, so I don’t know whether the system is basically any more “broken” now than it was then. I do know that executive pay has skyrocketed in recent years, but I don’t know whether or to what extent that correlates with “brokenness”. I too would like to know how tom responds to that.
Fair enough. From my reading it seems that executive compensation is not deductible - unless it is performance based. If it were made not deductible unless it was truly performance based, with some sort of test, that would help. I don’t think government caps are a good idea at all. More stockholder suits might help, as well as pressure from large institutional investors when low performing CEOs get big raises. More rules for boards fairly setting compensation would be good also.
Initial salary and continuing salary are two different things. To a certain extent starting salary is market based, and in most cases the board is not made up of cronies. There is no track record, so there can’t be performance based compensation.
Continuing compensation - high rewards for poor performance - is the problem.
Well, they are once you have free agency. It’s not a free market when owners used to refuse to hire ahtletes from another team without an owner initiated trade, right? Back then athelete salaries were depressed - now, with more of a free market, they are higher.
But the real reason the situations are not analogous is that CEO salaries are not set by an independent owner. (Even after negotiation.) Instead they would be set as athlete’s salaries would be if the people making the decision were a set of athletes, well paid, some selected by the athlete whose salary is under discussion. CEOs are on compensation committees, right? Its clearly to their benefit to drive up average compensation, since they can then point to other CEOs as justification for big raises.